Trade Deficit Shows Need to Improve Exports

The Commerce Department stated on Tuesday that the trade gap increased in September 7.6% to $43.03. It is much larger than the estimated $38.1 billion. It is believed that an improving GDP will lend to improvements in exports but this not what happened. The results may be long-term or short-term but do reflect a need for the U.S. to adjust its policies to return to a higher exportation status unseen since a generation ago. Exportation is a solid reflector on internal capacities of a nation to meet market demands.

Much of the recent decline is associated with global economic factors much outside the control of the U.S. The biggest losses were a 6.5% decline in exports to the European Union, 3.2% to China, and 14.7% to Japan. The losses seem to reflect lower economic activity in all three regions of the globe and may simply be a factor of total consumption.  That doesn’t mean the country can’t improve its export capabilities.

Outside of a slower global economy are two major points that should be considered. 

Dollar Value: The dollar has an impact on the total cost of American made products to foreign buyers. When the dollar is cheaper American products become cheaper as well. Research supports the idea that the deflation of the dollar improves exports (Bahmani-Oskooee & Ardalani, 2006). The opposite is also true; a rise in value of the dollar makes imports cheaper and lends to increased trade deficits. 

Regional Export Specialization:  One of the reasons why I am an advocate of regional hubs is that specialization raises exportation but is not so much as to thwart adjustments into complementary products and services when the market shifts. According to Naude, Bosker, & Matthee (2010) and their analysis of exportation found that specializations increased local economic development.  

The dollar amount is difficult to adjust unless you artificially deflate its value while a global slowdown isn’t something in our control. However, ensuring that a greater allocation of international business is in the hands of American companies and worker pockets is important. This requires a level of hub based development focus to create efficiencies that lower the overall cost of production that make companies more competitive. 

When regional hubs are attracting investments, improving their infrastructure, developing the right skills in the local labor market, and generating market breakthroughs they naturally lower the cost of production and improve market relevance. The dollar may be worth more but the cost of production is lower to thwart its damaging effect. A higher dollar can be used to purchase raw materials and turn them into higher profit exports. 

http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm

Bahmani-Oskooee, M. & Ardalani, Z. (2006). Exchange rate sensitivity of U.S. trade flows: evidence from industry data. Southern Economic Journal, 72 (3).

Naude, W. Bosker, M. & Matthee, M. (2010). Export specialization and local economic growth. World Economy, 33 (4).

Spurring Economic Development through Exportation of Value-Laden Efficiencies

The authors Ha and Swales (2012) attempt to determine the single-region IO analysis of a stylized export-base model. They found that improvements in value-added efficiencies also improve upon the GNP of countries and the labor market. There were also regional improvements in exportation which helped to sustain growth.

Exports are the underpinning of strong economic activity. The export-base model is a simplified version of the Keynesian demand-driven approach whereby exports and regional productivity are linked. As market demand increases so does the need to produce more products for export. This in turn can increase economic activity to meet market demands.

Generally, when policy makers want to increase exports in the export-based model they introduce and spend money on the port and other export functionality. It is hoped that by reducing the costs through investments that it will make exportation cheaper and encourage more use of the facilities. This has a positive effect but can be limited if the internal regional mechanics are not improved for greater competition.

Exports have an impact on the region. Furthermore, they can also influence surrounding areas that contribute to the exportation of products. There is a separation between domestic production and export production. Export production being that which is sold to other markets while domestic production serves the needs of locals. At times these are blended together because they relate to each other.

Increases in efficiency also increase other areas of the sector. There is a cross-breeding that creates higher levels of adaptation within the market. In turn, increased value-added efficiencies also improved the Scottish Gross National Product. As companies produced more efficient products that were demand laden in the market the wealth of the region increased.

Improvements in the exporting of products are also not the only benefit. The local economy also improves through growth within the labor market. The fundamental aspects of the economy improve through the creation of stronger efficiencies, value-added products, improved exportation, and general employment opportunities.

To further the reports findings, GNP improvements can be fostered through improvements such as deep sea ports that help to create efficiencies in exportation. Yet, in alignment with the report, true improvement is outside massive spending and instead lies in the efficient development of new products and services that improve upon market principles. These improvements enhance the labor market, bring more relevant products to the international market, and create stronger regional growth. Through rejuvenated products and services comes growth.

The simple Keynesian model used to do similar analysis is as follows:

AD=C+I+G+(X-M)

C=Consumer Spending

I=Investment

G=Government Spending

X-M=Exports minus Imports. 

In the model when a shock has occurred government can increase spending to improve other areas. The problem with prolonged government spending is that it throws the equilibrium out of balance as that spending must either be paid for by increasing taxes or increasing debt.  It is better, at least in the long-run, to improve upon the market principles of creating more relevant value-laden products and services for exportation. Improved exportation improves upon the fundamentals of the local economy, improves labor opportunities, increases tax revenues through expanded economic activity, and develop higher levels of sustainable growth. Where government does wish to spur activities it should focus on those areas where it improves upon efficiency for multiple industries such as ports, collaborative development, infrastructure, improved market information, market hubs, drawing foreign investment, educational improvements for labor/innovation development, etc. It is important to remember that government spending and influence should be to improve upon the economic fundamentals and the environment versus short-term purchasing of inefficient economic activity.

Ha, S. & Swales, K. (2012). The export-base model with supply-side stimulus to the export sector. Annals of Regional Science, 49 (2).